Debate on commodities bill divides US Senate

Democrats and Republicans traded charges of obstructing debate as the US Senate began on July 22 to discuss Majority Leader Harry M. Reid's (D-Nev.) bill to reform energy commodity markets.

Nick Snow
Washington Editor

WASHINGTON, DC, July 22 -- Democrats and Republicans traded charges of obstructing debate as the US Senate began on July 22 to discuss Majority Leader Harry M. Reid's (D-Nev.) bill to reform energy commodity markets.

Democrats said that Republicans wanted to delay consideration of S. 3268 by weighing it down with amendments. Republicans responded that Democrats were not willing to consider more meaningful steps, such as opening more federal land to oil and gas leasing.

The Senate agreed to invoke cloture and limit debate on the bill in a 94-0 vote before recessing for lunch. But the two parties clearly stayed sharply divided over how to address near-record crude oil and gasoline prices and their impact on consumers.

"The American people watching these proceedings must think they've tuned in to an episode of The Twilight Zone. They see that members from both sides of the aisle are hearing complaints from their constituents about high [gasoline] prices. They're asking why we can't agree on a solution if we can agree on the problem," Reid observed just prior to the vote.

The bill, which he introduced July 15, would give the US Commodity Futures Trading Commission authorization to hire 100 more full-time employees to monitor and regulate commodities markets. It would change the definition of "legitimate hedge trading" to include only producers and purchasers of actual energy commodities, and would place limits on trading by others.

Additional provisions
S. 3268 also aims to make over-the-counter commodities transactions more transparent by making traders provide more detailed information to the CFTC. It also would require the CFTC to routinely collect detailed information from index traders and swaps dealers, and differentiate the two groups. The bill also would establish working groups to study long-term international and domestic energy market trends, including the impacts of institutional investing and speculative trading, and order the Federal Energy Regulatory Commission to study the role of financial institutions on the natural gas market.

Reid and other Senate Democrats indicated that the bill provided a starting point for a fuller effort to bring oil prices down by curbing excessive energy futures speculation. Republicans questioned Democrats' claims that speculation was largely responsible for soaring crude oil prices and suggested that increasing domestic supplies would be more effective.

Energy and Natural Resources Committee Chairman Jeff Bingaman (D-NM) noted that his and several other Senate committees have held hearings to examine the impacts of speculative investments on energy markets. "We have heard testimony from industry analysts, traditional producers and consumers of petroleum products that the recent run-up in crude prices can be attributed, at least in part, to the rise of 'new fundamentals' in our energy markets. These new 'fundamental forces' include nontraditional investment flows into energy commodity markets as asset managers seek to hedge against inflationary risks and the decline of the value of the dollar," he said.

This investment flight into commodities is a symptom of an ailing general economy, he continued. It also poses questions from an energy market perspective, including whether and how the influx of billions of dollars in relatively passive investment is having an impact on the fundamental price discovery function that the markets were designed to perform, Bingaman said. "That is to say, to some pension fund managers and index investors taking positions in the oil markets, the price of a barrel of oil on any given day may be immaterial. Whether the price is $5 or $100/bbl, their oil market positions are designed to balance the risk in other parts of their investment portfolios," he explained.

Paper barrels
"The question for policymakers is whether this investment, this demand for paper barrels, has begun to swamp the price signals generated by the more traditional hedgers, the large producers and consumers of petroleum products in tune to the real-time dynamics of supply and demand," Bingaman said.

John Cornyn (R-Tex.) responded that Democrats have indicated that excessive energy commodities speculation represents only about 20% of the oil price problem. "Why aren't we addressing the other 80%? Republicans would like to solve 100% of the problem, assuming that's possible," he said.

He conceded that many Democrats are right when they argue that US oil and gas resources represent a relatively small portion of the world's remaining reserves. "It's important for Congress to realize that the one place we have the power to do something is on lifting the moratoriums on 85% of the Outer Continental Shelf and to authorize leasing within the 2,000-acre postage stamp within the huge Arctic National Wildlife Refuge. Yet every time Republicans try to bring up a bill to develop a new energy resources, Democrats block it," Cornyn said.

Byron L. Dorgan (D-ND) said Republicans simply were asking the Senate to make false choices. "It's fascinating to hear them come out and do this. Every 10 years or so, the same people come out and say find more and use less. We need something that's game-changing. You won't get that from those who say do the same thing, only drill deeper," he said.

Speculators have grown from 37% of the total oil futures market in 2000 to 71% in 2008, he added. "There's no other explanation for oil's price doubling within a year. Will the minority support this bill to address excessive speculation or simply insist on producing more? It's long past time for this country to change its energy mix. Drilling is not the only answer," Dorgan said.

Carl M. Levin (D-Mich.) said the Senate's Permanent Subcommittee on Investigations found in four separate inquiries that speculators are playing a bigger role on oil commodities markets, growing from 20% in 2000 to 40% in 2008. These estimates are an understatement since the CFTC classifies index funds as commercial traders, he said. "The need to control speculation is urgent. The president and chief executive officers of our major airlines have said so," Levin said.

'Message is clear'
But Pete V. Domenici (R-NM), the Energy and Natural Resources Committee's ranking minority member, said that Republicans will insist that other issues be addressed. "In overwhelming majorities, the American people have said they want more energy production here at home. In response to this clarion call, it looks as if the majority will have to be dragged, kicking and screaming, into even discussing these issues. It seems content to hang its hat on commodities speculation and a so-called 'Use it or lose it' strategy," he said.

Acknowledging that Reid has said Republicans could offer their drilling amendment and Democrats would offer their own, Domenici said much more would be needed to pass substantive energy legislation. The 2005 Energy Policy Act was on the Senate floor for 10 days, had 23 total roll call votes (19 of which dealt with amendments) and contained 57 amendments of the 235 that were proposed when it was finally approved, he noted. The 2007 Energy Independent and Security Act was on the Senate floor for 15 days, had 22 roll call votes (16 of which involved amendments) and contained 49 amendments of 331 which were proposed when it was finally approved, Domenici said.

He also attacked the Democrats' "Use it or lose it" proposal, which he said originated with the Wilderness Society, an environmental organization that has sued to stop oil and gas development. "The tracts are already leased, and oil companies are trying to get the maximum return on their investments. In contrast, Congress currently continues to restrict access to 574 million acres of the OCS. It's clear who's sitting on domestic oil and gas resources," Domenici said.

Other Republicans suggested that Reid's bill could have harmful consequences. "It could limit investment opportunities for seniors' pension funds and drive US jobs overseas. All it does is delay other efforts that could make a difference," said John Ensign (Nev.). "Efforts to address market manipulation require a careful balance. Increased visibility should not translate into excessive regulation," said John Barrasso (Wyo.).

"Democrats have said from the start that curbing excessive speculation is not a panacea for high oil prices. But it's obviously an attempt to solve a major part of the problem. This kind of speculation wasn't even legal 8 years ago. Traders had to accept delivery of oil, something Wall Street investment banks weren't prepared to do. We're willing to give Republicans a vote on their drilling amendment to get this bill passed. But Democrats would like to vote on their drilling proposal too," Reid said.

Contact Nick Snow at nicks@pennwell.com.

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